If you invest your entire capital in a biotechnology sector mutual fund or biotech exchange traded fund (ETF) with 50 biotech stocks in each fund, then you would have eliminated all of the company-specific risks and your portfolio will be almost fully diversified. Explain whether or not this is a valid diversification argument according to the discussion in Chapters 6 and 25. Limit your answers to no more ten sentences.
Chapter 25 explains that it is better for investors to have part of their money invested in a risk-free asset. Remember that the return (reward) to risk ratio from the new efficiency frontier with the risk-free asset (CML) is better than from the old efficiency frontier with no risk-free asset. Explain why this the addition of a risk-free will lower the overall portfolio risk and raise reward to risk ratio. Limit your answers to no more ten sentences.